California, Unsaved, Speeds Toward a Wall of Debt

Jan. 17 (Bloomberg) -- A cursory glance at Governor Jerry
Brown’s new budget could make you believe that California’s days
of fiscal gloom are over as he champions a balanced budget and
newfound “fiscal restraint.”

California had been floating in debt. Then Brown persuaded
voters in November to increase sales and income taxes. Now he
releases a budget that, as Brown said at a news conference last
week, advances a progressive agenda but does so based on
available dollars.

Is California on to something? Is Brown’s formula -- a
combination of government idealism, tax increases and tough-minded budget choices -- the answer for the nation, as well?

As tempting as it might be to buy this story line, the
answer is no. In reality, the Brown approach is the latest in a
series of “kick the can down the road” budgets that ignore the
buildup of debts. It rewards public-employee unions with pay and
benefit increases -- while shielding them from desperately
needed pension reforms -- and ignores deep problems within the
state’s economy.

The nonpartisan Legislative Analyst’s Office agrees that
the budget is basically balanced, but the agency’s head, Mac
Taylor, expressed concern: “It doesn’t pay all of the wall of
debt within the time period. It builds up very little of a
reserve by the end of that period, and it does nothing regarding
our various retirement-related obligations.”

Crushing Burden

Others were blunter about California’s financial health. As
the Los Angeles Times reported: “It owes Wall Street more per
resident than almost every other state. And it has accumulated a
crushing load of debt for retiree pensions and health care, now
totaling more than taxpayers spend each year on all state
programs combined.”

The Times compares the state’s situation to that of the
California cities of Vallejo, Stockton and San Bernardino, which
all became insolvent largely because of their inability to pay
for public-employee pensions and health care.

State Senate Republican Leader Bob Huff, writing in the
Republican-leaning Flash Report, accused Brown of playing a
shell game with the tax-increase funds, which were promised to
public schools but are now being used to reward public
employees. “Pay raises and lifting of the monthly personal
leave day without pay for state employees certainly is a payback
to the state unions who helped pass Prop 30,” said Huff,
referring to the tax increases and pointing to projections that
state spending will rise by $25 billion over the next four
years.

Voters in November also approved a tax increase for out-of-state businesses in order to fund green-energy projects. Brown
includes environmental upgrades at schools as part of the
state’s per-pupil spending formula -- something that raised
questions from the Legislative Analyst’s Office and others.

The budget indicates that California’s recovery is
bolstered by rising home values, better credit conditions,
stronger household spending, and modest, but improved, job
creation. But this rosy view doesn’t take into account the
negative effects of new taxes and regulations, said David Wolfe,
the legislative director of the Howard Jarvis Taxpayers
Association. California’s cap-and-trade system, the first plan
in the nation to combat global warming by imposing costs on
greenhouse-gas emitters, will slow manufacturing, he said in an
interview.

The state’s forecasters assume that people don’t change
their behavior in the face of new taxes and fees, Wolfe said.
It’s too early to know the fallout of California’s higher
income-tax rate. What if the millionaires move?

Property Taxes

As California’s real-estate market rebounds, Democratic
legislators are already talking about eroding the protections
from Proposition 13, enacted in 1978. That measure capped taxes
at 1 percent of the sales price of a property (plus voter-approved local bonds and parcel taxes), with tax increases
limited to 2 percent a year until the property is sold. Fiddling
with that law will probably push property values lower.

Some Democratic legislators want to start with a ballot
initiative that would remove Proposition 13 protections from
commercial properties, while leaving them on homes. Governor
Brown might not want to deal with the potential implications of
such a measure during his re-election bid in 2014, according to
the San Jose Mercury News, but the newspaper sees efforts to
soften Proposition 13’s protections against local parcel taxes -
- a form of across-the-board property tax -- heating up this
year. “The third rail of California politics may not be as
deadly as once thought,” the Mercury News concludes.

This touches on perhaps the biggest challenge to the
state’s fiscal health: Democratic supermajorities in both houses
of the state Legislature, combined with Democratic control of
all constitutional offices. With Republicans now irrelevant,
Democrats can raise taxes and ramp up spending at will, meaning
that the cycle of artificially produced fiscal crises will speed
up, with a legislative majority committed to the endless growth
in government and the protection of public-employee pay and
privilege at all costs.

Until California’s leaders tackle the state’s enduring debt
issues and view the private sector as the generator of economic
growth, rather than as a means to fund government, California’s
next fiscal crisis will always be just around the corner.

(Steven Greenhut, a Bloomberg View contributor based in
Sacramento, is vice president of journalism at the Franklin
Center for Government and Public Integrity. The opinions
expressed are his own.)